ASC: Are you ready for demand growth?

02 May 2014 15:59[Source: ICB]

Healthy economic indicators presage stronger and more stable growth for the next three years, despite some concerns around consumer spending power

According to numerous leading indicators considered by analysts at ITR Economics, the US economy will continue on a growth path through 2016. Despite some concerns which will lead to a softening at the end of 2014 and into early 2015, growth will be stronger and more stable overall than it has recently, says senior analyst, Jeff Dietrich. For the adhesives and sealants industry, the news is particularly good, because many of the end-use markets it serves will be growing at healthy rates. Manufacturers that take proactive steps to meet demand growth will maximise their opportunities for success over the next couple of years.

Dietrich: strong and stable growth

Copyright: ITR Economics

The leading indicators tracked by ITR Economics include the Purchasing Managers Index issued by the Institute for Supply Management (ISM), the US Leading Indicators index published by the Conference Board, corporate bond prices and the stock market, as well as industry statistics, the inflation rate, tax policies, interest rates, the state of the housing market, the remodelling industry, unusual events/natural disasters, and other economic performance numbers and secondary data points that other forecasters may overlook, discredit or misunderstand.

“Gross domestic product is up 2.6% and industrial production is up 2.9% on a quarterly basis, which are just two of many healthy signs that, despite business owner concerns and the persistent uncertainty we have experienced in the last several years, growth is continuing and is fairly stable. The same can be expected through 2016; while there won’t be any surging expansion of the economy, there won’t be any recession either,” asserts Dietrich.

RISING COSTS A CONCERNThat is not to say there are not any issues that could moderate the level of growth. In fact, there are three main concerns: the high rate of under- and unemployment, rising health care costs and taxes for consumers, and continued economic struggles in other countries around the world. “With a combined under- and unemployment rate of over 12%, the poor jobs market is one of the main reasons we are not experiencing a greater growth rate. Consumers account for two-thirds of our economy, and clearly the more people that are working, the more money will be spent,” Dietrich observes.

Many of those people that do have jobs are faced with rising healthcare costs and increasing taxes. “The concept of affordable healthcare is not working out quite as expected, and many consumers – and businesses – will be saddled with higher healthcare costs in the form of out-of-pocket expenses that they did not have before. As a result, at least some of their discretionary funds will be used to cover these added expenses, as well as higher taxes, and they will have less to spend,” says Dietrich.

In addition, the US cannot look to emerging markets to help with economic growth. China is experiencing a much slower growth rate, for example. Other emerging economies are faced with currency issues and political/social problems. At the same time, Europe is slowly beginning to emerge from its second recession now that austerity measures have paid off. Japan, meanwhile, is out of recession, but only recently. “These countries are struggling to get their economies back on track, and the US, rather than finding demand elsewhere in the world to help prop up its economy, is the major source of current global growth at this point,” Dietrich explains.

As a result of three factors, ITR Economics is predicting a softening in the market in the fourth quarter of 2014, and possibly late in the third quarter, through early 2015. “The lack of employment growth and increased pressure on consumers in terms of rising healthcare costs and taxes will impact consumer spending. We stress, however, that we will still experience growth during this period, but at a slightly lower rate. Furthermore, we see a return to stronger growth rates once other economies around the world begin to move into growth phases as well. At that point, we will see companies start to hire again, which will spur greater growth,” states Dietrich.

BE PREPARED FOR GROWTHThe adhesives and sealants industry will definitely benefit from the continued growth, as many of the end-use markets it serves experience healthy growth and should see improvements over the next two years. To capitalise on this, business must be prepared. “Adhesive and sealant business owners and managers should definitely be evaluating their ability to meet future demand and considering investments in capacity, equipment, research and development capabilities, human resources, and all aspects of their operations. Only those companies that can continuously provide their customers with the quantities of materials they need to meet growing demand will realise the maximum opportunities presented by this market growth that will occur through 2016,” he says.

One of the most notable, positive signs is related to the perspective that many business leaders are taking today. “Until very recently, most of these business leaders were focused on the past and driven by the fears engendered by the recent recession. That has changed noticeably in recent months, and today we see most business leaders now focused on the future and the opportunities it presents and how they can leverage them, which is a much more positive perspective and we believe is a strong indicator of real growth,” he says.

Author: Cynthia Challener

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